Thursday, March 19, 2020

Calabresi's 2-by-2 Box: On Property and Liability

Damages in contracts, and how it is calculated, can be interestingly explained by Calabresi's 2-by-2 box. His 2-by-2 chart is based on the property, liability and inalienability. 
Initial EntitlementInjunction / Property RuleDamages / Liability Rule
ResidentRule 1: Court issues an injunction against PolluterRule 2: Court finds a nuisance but permits pollution to continue if the Polluter chooses to pay damages
PolluterRule 3: Court finds the pollution not to be a nuisance and permits the Polluter to continue without paying damagesRule 4: Court permits Polluter to continue unless Resident chooses to pay Polluter damages in order to enjoin further pollution

In the Common Law of Contract, there are 3 ways to calculate damages.


1. Expectation Damages meaning that the damages will be equal to that value "as good as if contract has been performed".
2. Reliance Damages meaning that the damages will be equal to that value "as good as if no contract was made". 
3. Restitution Damages meaning that the damages will be equal to that value where "breach party would be as good as if no contract was made".

How do we say that these three rules derive and fit under Calabresi's 2-by-2 box? Let's redraw the box with the titles specific to contractual damages.
Initial EntitlementInjunction / Property RuleDamages / Liability Rule
PlaintiffCourt issues an injunction against Defendant. This means that the damages will be equal to that value "as good as if contract has been performed". Expectation Damages.Court finds a nuisance but permits it to continue if the Defendant chooses to pay damages. Here, the damages will be equal to that value "as good as if no contract was made". Reliance Damages.
DefendantCourt finds the it not to be a nuisance and permits the defendant to continue without paying damages. This is not possible. Court will not allow the Defendant to get away, and therefore this box is empty with respect to contractual damages.Court permits Defendant to continue unless Plaintiff chooses to pay Defendant damages in order to enjoin further nuisance. Here, the damages will be equal to that value where "breach party would be as good as if no contract was made". Restitution Damages.
 
Contract Law is one of the most basic, and most interesting subject! Hope you had some fun with the 2-by-2 rule. And, I think, this rule and logic can be fit in a lot more situations apart from law!  Where the claimant/plaintiff needs the property back, it would be futile to claim reliance damages, and expectation damages may be better. Therefore, understanding the rule and logic behind the types of damages can be useful while claiming for them. Not every type fits the needs of the claimant.

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